Data released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices shows that the annual growth rate in prices of existing single family homes across the United States continues its fall. This is the 18th consecutive fall in the growth rate going back to December of 2005. The data are those recorded through May of 2007.
The 10-City Composite’s annual decline is 3.4%, making home values reach their lowest levels since 1991. The 20-City Composite’s annual decline is 2.8%. 15 of the 20 metropolitan areas included in the index are now reporting negative annual returns on home sales.
Falling home prices indicate more difficulty selling houses and lesser profits for home owners who do manage to sell them. They also mean that home owners don’t have as much equity in their homes that they can borrow against to make purchases, leading to a slowdown in economic growth.
A loss in property values can have significant negative consequences for the United States economy, where real estate is a core investment holding.
Prices on homes have been falling in the United States largely because of the recent bursting of the mortgage bubble. For several years, lenders extended credit to nearly everyone, often through special programs that don’t require any verification of the borrower’s stated income or stated assets. Now, mortgage defaults are being turned in at a record pace, as people who stood on shaky ground financially and over-extended their debt with a new mortgage are unable to continue making their mortgage payments. Lenders who were counting on profits from interest on loans are taking huge losses, and ending up with homes on their hands that they don’t want.
The losses to investment funds that bought stakes in sub-prime mortgages have been devastating in some areas.
Interest rates have risen in the aftermath of the bubble’s bursting, discouraging many would-be house-buyers and further causing home prices to drop as property owners and realtors try to entice someone to take what they are selling.
In light of the most recent housing price data, the Federal Reserve might decide to act to lower interest rates by the end of 2007, which could have the effect of causing the rate of inflation to rise.
“At a national level, declines in annual home price returns are showing no signs of a slowdown or turnaround. Year-over-year price returns are continuing to either move deeper into negative territory or experience persistent diminishing returns. If there is any positive news in these numbers, it may be that in both May and April eight of the 20 markets showed positive monthly growth rates. This compares to only one or two of the 20 in the late winter and early spring. We need a few more months of data, however, to determine if this is the beginning of a national turnaround, since the national trend is still at a sharp deceleration,” said says Robert J. Shiller, Chief Economist at MacroMarkets LLC.
Standard & Poor’s (PR Newswire), “Late Spring Numbers Bring Chilly Returns According to the S&P/Case-Shiller Home Price Indices”